The rise and rise of the share premium account

Abstract

Share premiums now constitute a substantial proportion of UK company equity but rarely featured on nineteenth century company balance sheets. This paper discusses when and why this changed and why the definition of the share premium account as company capital took nearly a century to reach the statute books. From 1855 to 1948 any surplus above par on issued shares could be treated at the directors' discretion, including appropriation for the payment of dividends. This freedom was removed in the Companies Act 1948 (s. 56), after the Cohen Committee recommended that share premiums should normally be treated as share capital and employed in a very limited range of transactions. The paper outlines the accounting and legal history of the share premium account and argues that the growth of share premiums was due to a tax avoidance loophole, open from 1889 to 1973, which permanently changed company practice on share issues after 1920. The effect of legal restrictions on the use of the share premium account is also addressed. One possible future consequence of the loss of economic significance of the nominal value of a share is the total abolition of both this and the share premium account by adoption of no par value (npv) shares, a change which has recently been adopted in Australia and is again under consideration in the UK.